Revenue Procedure 2019-09: What Constitutes Adequate Disclosure for Purposes of Avoiding Penalties

The IRS recently published Revenue Procedure 2019-09, which is the Service’s annual pronouncement identifying the circumstances under which a disclosure on a taxpayer’s income tax return will be deemed sufficient for purposes of reducing an understatement of income tax for purposes of the accuracy-related penalty imposed under Section 6662(d) of the Code and for purposes of the return-preparer penalty imposed under Section 6694(a) of the Code.

Revenue Procedure 2019-09, § 4.02 identifies the tax items subject to its provisions.  When the amount of an item is placed on a line that does not have a pre-printed description on the return or schedule identifying the item, the taxpayer is required to clearly identify the item by including a description on the line where the amount is reported.  For example, to disclose a bad debt for a sole proprietorship, the taxpayer must type or write the words “bad debt” on the line on Schedule C where the bad debt is reported.  No additional disclosures of facts relevant to an item covered by the Revenue Procedure is required provided the forms and attachments are completed in a clear manner and in accordance with all applicable instructions.  The Service is careful to note that although a taxpayer may literally satisfy the disclosure requirements in Revenue Procedure 2019-09, the disclosures on the tax return will not permit avoidance of the Section 6662 accuracy-related penalty or the Section 6694 return-preparer penalty if the item or position on the return: (i) does not have a reasonable basis as defined in the Regulations; (ii) is attributable to a tax shelter; or (iii) is not properly substantiated or where the taxpayer failed to keep adequate books and records.